Taxpayer Behavior When Audit Rules Are Known: Evidence from Italy

Italy adopted in 1998 a peculiar audit scheme (Studi di Settore), for small and medium enterprises and the self-employed. This scheme is based on a particular interaction between the tax agency and taxpayers, where the agency unveils only part of the information used to develop its audit rule. The authors study this scheme by means of a simple theoretical model and they test it using a sample of 23,000 firms in manufacturing sectors in the 2005 tax year. A number of theoretically relevant relations are confirmed. In particular, reports made by taxpayers seem to be positively associated to the firm's size. When taxpayers know that the probability to be audited decreases, they tend to report less. Other factors that are expected to influence the behavior of taxpayers have no or an ambiguous impact on reporting behavior.